Netflix Strategy is Right and Wrong

In his email, Hasting apologized profusely, then turned around and further enraged his loyal 23-million subscriber base by taking the Netflix brand away from its red envelopes. Let me break down the good, the bad and the ugly of this classic story.

In the beginning.

Netflix was founded in 1997 and two years later it became the subscription-based DVD-by-mail service millions of customers in the United States and around the world were incredibly passionate about.

Netflix turned the Blockbuster model on its head. With its strict and steep late fees, Blockbuster created a lot of unhappy customers. So Netflix did the opposite and let consumers keep a movie as long as they wanted. When they returned one movie, they got another one.

It wasn’t as fast as Blockbuster; customers had to wait to get their DVDs in the mail. But no late fees, the fun of picking out your own movies, and the excitement of seeing the red package in the mail built a powerful Netflex brand.

Intense consumer loyalty and unbelievable word-of-mouth helped the Netflix brand took off like a rocket. Ten years later, Netflix had a library of 100,000 titles and 10 million subscribers.

Today, Netflix has 23 million subscribers, a high-flying stock and is very profitable. Last year its stock increased over 200%. Revenue in 2010 jumped 29% to $2.16 billion and net income was up 39% to $161 million. But with profits sometimes comes arrogance.

What’s next

One thing is always certain with technology: change is coming. In music, we went from record, to tape, to CD to digital. In video rental, we went from Betamax, to VHS, to DVD, to pay-per-view, to digital streaming.

Yet, it takes time for a new technology to completely replace an old one. This leaves existing brands in a bind. Do we stick with our profitable bread-and-butter product or do we move to the new technology? It might be small now but one day will probably take over the industry? How do we cross the chasm?

Netflix owns movies-by-mail. They might make a lot of money today, but are not the future. Netflix has wisely bet on streaming as its future. And they have wisely made an aggressive move to be first in the mind in order to dominate the new streaming-video industry. Currently, Netflix is the leader in the category.

But Netflix made a critical error by using the same name on its new streaming business as it does on its existing mail business. It might be logical to take a trusted and loved brand name and extend it from one business to the next. But it doesn’t make marketing sense. As time goes, each business will compete and clash with each other. Having the same name on both businesses is confusing from both a product and especially a pricing stand-point.

What Netflix needed was a new brand name. In his email to subscribers, Reed Hastings eloquently points this out. Except there is one huge problem. Netflix needed the new name for the streaming business and not the mail business.

Netflix means mail. You can’t move a brand so strongly held in the mind into a new position, especially one that is more technologically sophisticated. It is the same reason Barnes & Noble had trouble moving online for books (with the B&N name.) Or Blockbuster had trouble moving from stores to mail or streaming with the Blockbuster name. Both Barnes & Noble and Blockbuster needed new brand names for their online businesses. Now Blockbuster is bankrupt and Barnes & Noble is in trouble. They lost $74 million on sales of $7 billion last year.

Too late

Netflix also made a huge error by doing the name change now. The time for the new streaming brand name was when it launched its streaming business. Not several years later.

Netflix should have launched the new brand using its strong Netflix brand as the endorser. Never underestimate the power of a second brand. Especially when it is launched by a leader. Toyota successfully used this strategy when it launched Lexus, Scion and Prius.

You can’t change the past, but this summer Netflix had much better options than the ones it chose. In July, the company announced price hikes and new separate streaming plans. Almost two months later, it took the Netflix brand away from the 23-million loyal subscribers who love it and slapped it on its streaming service.

To add insult to injury, Netflix will give its movies-by-mail customers a new brand name, Qwikster. Why not just throw your customers down and stomp on their faces?

This summer, the better alternative would have been to buy Hulu. Netflex could then have used Hulu as its streaming TV/movie brand. Netflix, of course, would remain as the mail brand.

When you need a better name, buying a company to use its name can be a great strategy. Chemical Bank bought Chase. And ValueJet brought Airtran.

And if the rumors are right, and a spin-off is in the process, leaving the Netflix name with the mail business would make it more desirable to potential investors. Who wants to own Qwikster? The value of a business has a lot to do with a strong brand name.

For Netflix the future is uncertain. They have created a mess of their own making which has gotten customers extremely angry. The strategy of keeping up with a rapidly-changing technology by launching a second brand was an astute one. Unfortunately they fell down on the branding part and got it all backwards. Netflix is mail and the new brand should have been streaming. Sad to see it happen to such a nice company. Reed, next time call me first.

View Comments (11)

Qwikster is an awful name for the service. Too much like Grokster and Napster. Do you want a name similar to services associated with copyright infringement, even if Napster eventually went legit? Also, what's so "Qwik" about waiting several days for a DVD to arrive in the mail?

Hi, Laura. I agree that the new name is questionable, but I disagree on the strategy. If we're supposed to be customer focused and not internally focused, why separate the two?
To subscribers, Netflix represents movies and TV series. Whether the products come via streaming or the USPS, it's unimportant to the user. In fact, leveraging one with the other, like they did before this fiasco, made a lot of sense. One credit card charge, one site to list favorites, and one site to keep track of what we view.
The rationale the CEO gave for the separation has to do with operations. I appreciate that, but to consumers, why should they care?

Laura, great article and the point is very well made. But is it true that the Toyota brand has always explicitly endorsed Lexus? In the UK Lexus was initially launched as a quite separate brand with its own dealers and car showrooms. That's still the case. I just checked and only now is there a mention of Toyota in the bottom left hand corner in small letters of the Lexus UK website. Even today many people in the UK don't know the connection between Toyota and Lexus.Maybe the company has used different strategies in different countries?

@Hugo - Valujet bought AirTran long before the Southwest deal, back in 1997.
I disagree with Laura on the Netflix change though. There was zero marketing reason for Netflix to spin off the DVD or streaming business, they have been successful in both arenas and are first in the mind.
However, there was ample business reason to spin off the DVD portion of the business. I, and many others, predict that they want to let Quickster die. The endgame for Netflix has always been streaming video, and they don't want the eventual failing of the DVD portion to drag down the "perfect" Netflix name.

Thanks for the correction Noah. Always good to know history. And I think it was wise for Southwest to but Airtran. The name is an issue, since the airline will now be "national." But after so many years, the name really is more connected to low price than geography.
As for Netflix, I agree. The move to separate the DVD business from Streaming is a wise business one. DVD will eventually die. But no matter what they try to call it, the DVD will always be Netflix in the mind. Like the artist formerly known as Prince.
The best move would have been a new streaming name and selling off Netflix.

There sure is a lot of banter out there regarding the Netflix/Qwikster branding fiasco. Always like to hear other insight from professionals like yourself. We too shared our thoughts: http://www.brandingbusiness.com

Netflix ,can make corrections . Like the Coca cola did by re -introducing the original coke . In India Reliance Industries ( Mukesh Ambani) Group, has entered in the retail sector. And has Reliance as prefix before every format it has entered into. For instance Reliance Timeout , Reliance Jewels etc... The brand recall in case of Netflix can do the same trick for its new business venture as well.